From Riches to Rags

Friday, December 21, 2007

China and India are poorer than we thought; rich countries produce even more than we realised. Those are the obvious conclusions from an unprecedented exercise, carried out by a World Bank-led coalition.

The ?International Comparison Program? attempts to compare the size of the world?s disparate economies on the basis of purchasing power. On this basis, China?s output is just 9 per cent of global gross domestic product, down by more than a third from the previous estimate of 14 per cent. India?s share of global GDP is down from 6 per cent to 4 per cent. The total output share of developing economies is down by a sixth. These are huge revisions to the figures.

The obvious questions are: how could the old figures be so wrong? And can we trust the new figures? The simple answer is that calculating purchasing power is hard even in principle.

The Economist?s famous ?Big Mac? index captures the theory but not the slog: if a Big Mac costs $4 in the US and 12 yuan in China, then the purchasing power of the yuan is 3 per dollar ? but only if you are buying hamburgers. Statisticians cannot stop at the Big Mac but must work out both the contents and the price of a representative basket of goods. With populations of more than a billion, being truly representative is almost impossible.

China has never participated in an exercise on remotely this scale before. India has not done so since 1985. Small wonder that the facts have changed substantially. So while the new figures can never be more than statistical estimates, they are far more credible than the finger-in-the-wind guesses that preceded them.